Template-type: ReDIF-Paper 1.0
Author-Name: Florin Bilbiie
Author-Email: florin.bilbiie@nuffield.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence
Author-Workplace-Homepage: http://www.nuffield.ox.ac.uk/Users/Bilbiie/index.htm
Title: Limited Asset Markets Participation, Monetary Policy and (Inverted) Keynesian Logic
Abstract: This paper incorporates limited asset markets participation in dynamic general 
equilibrium and develops a simple analytical framework for monetary policy analysis.
Aggregate dynamics and stability properties of an otherwise standard business cycle 
model depend nonlinearly on the degree of asset market participation. While 'moderate' 
participation rates strengthen the role of monetary policy, low enough participation 
causes an inversion of results dictated by ('Keynesian') conventional wisdom. The slope 
of the 'IS' curve changes sign, the 'Taylor principle' is inverted, optimal 
welfare-maximizing monetary policy requires a passive policy rule and the effects and 
propagation of shocks are changed. The conditions for these results to hold are 
relatively mild compared to some existing empirical evidence. Our results may help 
explain the 'Great Inflation' and justify Fed behavior during that period.
Classification-JEL: E32, G11, E44, E31, E52, E58
Keywords: limited asset markets participation, dynamic general equilibrium, aggregate demand, Taylor Principle, optimal monetary policy, real (in)determinacy
Length: 42 pages
Creation-Date: 2005-03-01
Number: 2005-W09
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w9/LAMP_theory.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:0509